How Does a Forbearance Agreement Work?

Credit Saver Agreement

Both borrowers and lenders use forbearance to stop or delay default on a loan. It is a temporary solution, often used to help the borrower who is in a tough financial situation. The forbearance is most commonly seen in the student loan industry, where students use forbearance to delay the start of payments on those loans. The concept of forbearance is not exclusive to student loans. In fact, mortgage companies readily use this solution to help homeowners, because a foreclosure on a mortgage is bad for lenders as well.

A Bad Situation

To initiate a forbearance agreement, the borrower must be behind on loan payments. The amount of time in delinquency varies from one lender to another. Usually a borrower, who is one to three months or more behind on payments can initiate the forbearance agreement. This is done by calling the lender.

Situational Analysis

The lender then gathers information on the circumstances that led to the delinquency. Such information is very important in determining if the borrower qualifies for a forbearance agreement. The circumstance leading to the delinquency must be extraordinary, like job loss, serious illness or a death. It must also be a situation that the borrower can recover from. For example, recovering from job loss means looking for a new job.
Rebounding after a death or serious illness could mean a change in the financial structure of the family. For example, the widow may find work to cover living expenses and the loan. Also, the recovery from the illness and returning to work can allow the borrower to resume regular payments. No matter what the situation, it must be temporary.

Negotiation

After reviewing the situation, the lender will then sit down with or call the borrower to negotiate a temporary payment plan to help bring the loan current. Solutions include removing the interest amount from the monthly payment, leaving only the principle and an additional amount to bring the loan current. The interest doesn't disappear, it is tacked onto either the end of the loan or spread over the life of the loan until it is paid.
Other solutions may include biweekly payments or moving a payment or two to the end of the loan period---giving the borrower a few months of now payment in the present. There are, in fact, several types of payment arrangements that only the lender can authorize. Each forbearance agreement is tailored to the borrower and his or her financial situation.

Payment

Once negotiated, the forbearance is signed and becomes a binding agreement. Some lenders allow renegotiations if needed. However, any missed payment will constitute a broken forbearance agreement and foreclosure or default proceedings will commence. Filing for bankruptcy may also void the forbearance agreement, as most have clauses against the filing.
After the agreed upon time period ends, the borrower goes back to regular payments.